CASE STUDY 2 Essay Example

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Enron Corporation was incorporated in 1930 as a Northern Natural Gas Company. Before filing for bankruptcy the company was the largest in the natural gas and energy production. It had global markets that enabled it to market its products to several clients across the globe. As well, it had the most notable gas transmission systems running for more than thirty six thousand miles and served both industrial and emerging markets. The company substantially incorporated innovative strategies to overcome the competitors. Some of the key competitive advantage strategies utilized included weather futures and gas futures. However, in the early 90’s the company run into numerous difficulties that eventually led to its collapse. The accounting practices exercised led to a magnitude of continuous losses. In addition to the above, the losses were not revealed to the investors. Some of the key dates in the company include 1947 when the company was listed on New York stock exchange. In 1985, the company merged with Houston Natural Gas Corporation while in 1986 the name of the company was changed to Enron and was based in Houston. In 1999, the company launched Enron Online (EOL) where the company could market their products online. Finally, in 2001 the company filed bankruptcy after experiencing magnitude losses eventually leading to its collapse and fall out.


Enron is one of the companies that have been studied on various occasions by scholars, researchers and other interested parties. The main objectives of the studies are to determine the reasons and factors that led to its collapse. However, the purpose of this paper is to discuss the various risk issues associated with the fall of the company. This fall is considered as one of the most infamous action in the present American corporate history. One of the most significant reasons that led to the collapse of the company is poor leadership and management. There are several issues and decisions that conducted by the company managers that are substantially questionable. Secondly, the accounting principles exercised in the company are not up to the standards. Most of the accounting practices were realized to be fraudulent and thus led to the bankruptcy experienced by the organization before its fallout. Therefore, it is imperative to note that Enron Company neglected various business risks that had an influential role towards the success of the company. Some of the most profound and notable risks include market risk, legal risks, internal control risks, high degrees of leverage, and several other competitive industry risks that play a vital role in the overall success of the company.


One of the departments that substantially played a vital role in the collapse of the company is the accounting department. Arthur Anderson is the primary firm that provided tax issues, accounting services and audit services in the United States during this period. Typically, the firm was among the best five that was considered as the most outstanding in accounting and related issues. One of the key pillars and principles of the company is the provision of high quality and risk management practices. This is where by every step in the accounting process are proceeded with great care and strict adherence to the code of conduct. Hence, Arthur Andersen provided the required consultancy and procedures to be followed in accounting to the Enron Company. As a result, due to these strong adherences to accounting principles Enron emerged as the fastest growing energy company in the United States during the 90’s. However, it is imperative to note that there is some core risk factors that were substantially ignored eventually leading to the collapse of the company.


It is imperative to note that accounting department plays a vital role in the success of any business organization. This is because the department is concerned with majorly issues of finances that can be crucial in key decision making. Therefore, successful companies have substantially invested in this department to ensure that all the requirements such as competent employees and reliable software is available for utilization. Research reveals that Enron Company neglected most of the accounting principles and standards. One of the key issues is that the investors could not access the financial information of the company. In the normal situations, a company is expected to avail financial information such as financial statements on monthly, quarterly, or annually depending on the company. However, as a result of this failure to provide this crucial information to the investors Enron’s stock price appreciated whereas it was expected to reduce (Curall, & Epstein, 2003).

The accounting department regularly updated financial statements to show the progress on issues such as profitability. Another unethical action taken is where toxic accounts were transferred to subsidiary businesses and these exercises were not completely disclosed. On the contrary of expectation, Arthur Anderson firm approved such maneuvers confirming to the investors that all was well with the company. Later on, the fraudulent acts were discovered and the companies involved faced federal prosecution.


In the 1990’s Enron was the fastest growing company in the energy sector. As a result, there were few competitive companies in the local and global markets. This led to the attraction of various foreign and local investors who readily accepted the spiking share prices as the new normal. As well, the company substantially incorporated technology in their operations as a competitive advantage. For instance, they initiated Enron Online (EOL) where by it was an online website where the company sold various products and services. This is the platform that enabled the company to market its products and services as well. As a result, the company reputation substantially grew leading to the increase in the number of customers all over the world translating to increased sales. In addition to the above, the company initiated projects of building high speed and reliable networks that could enable faster communication with the company stakeholders such as clients, investors, and managers. However, a lot of dollars was spent on these projects due to the lack of proper accounting and the company almost ran to losses (Curall, & Epstein, 2003). The 2000-2001 economic recessions negatively affected the company. Due to the recession, the trusting investors and creditors realized that they were in the losing end of the unfavorable market.


Arthur Anderson provided the best consultancy to the company concerning accounting practices. For instance, through them the company was in position to incorporate some innovative accounting and greater stock prices. Conversely, the company could not be in a better position to accept lower interests from the loans with the lack of capability of transferring debt off the balance sheets. To achieve this they created special purpose entities with the primary objective of generating additional capital and neglect debts. As a result, the company resorted to setting off the troubled assets rather than including them in the books of records. Due to all these issues the company was supposed to compensate all the partners. To achieve this, they assured extra shares of the inflated stocks but at the end the company had a thousand or more special purpose entities (SPE’s) (Thomas, 2002).


The above discussed risk themes clearly explicate some of the main issues that triggered the collapse of Enron. As a recap, it is instrumental to note that the company’s legal and regulatory structure substantially played a vital role towards the fall of the company. The laws should not have allowed firms such as Arthur Anderson to approve transactions that are fraudulent. These are the companies that are expected to provide audited reports that are trustworthy and can be useful in key decision making. Secondly, research reveals that Enron as a private company hired the auditors of their choice; as a result, the hired auditors can be a source of conflict of interest since the auditors have the incentive of issuing unfavorable auditing reports. It is clear that an auditor cannot issue unfavorable auditing reports to the company that is paying them. In this case, the investors are the primary stakeholders to be affected since they expected that the company is running smoothly yet the opposite is happening.

As well, it is worth noting that the management in place was not competitive and competent. Currently, it has been noted that the management of the company has very influential role to play in the success of the organization. They are the people who set the goals and objectives to be achieved by the organizations. In addition to the above they are responsible in ensuring that these goals and objectives are achieved effectively and efficiently. Some of the techniques applied to achieve this is hiring of competent and qualified employees (Thomas, 2002). As well, the working environment is ensured that it is conducive to enable job satisfaction and boost employee morale. Presently, companies are employing competitive managers, managers that can put in place strategic plans to ensure that the company succeeds. Therefore, Enron’s poor management has to be blamed for the systematic issues that triggered the fall of the company. This is a clear indication that organization should strive to ensure that the management is up to the tasks upon them. Each and every member of the management should be aware of their duties and responsibilities that can be crucial to the success of the company.

Finally, it is worth noting that Enron substantially lacked the use of code of ethics that are applicable in business world. Business ethics governs the way businesses are conducted and are universal. For instance, there are guidelines on how stakeholders such as managers, employees and clients are expected to carry themselves. Code of ethics prohibits managers from being involved in issues that does not align with the company goals and objectives. However, it is imperative to note that these codes of ethics are not mandatory but voluntary. As a result, the managers can choose to set aside such codes and assume them though the consequences are inevitable. Most of the current legal systems allow managers to set aside the code of ethics resulting in conflicts of interest. Thus, it is the obligation of the managers and other organization executives to ensure that they work and act to the best interest of the organization and its stakeholders such as clients, investors, employees, and shareholders.


First of all, sticking to the accounting principles and standards should have played a vital role in the success of Enron Company. However, to avoid such related risks of collapse other companies should ensure that they strictly adhere to the standards of accounting. As well, there is a substantial need that companies hire the service of qualified and competitive accounting professional. This will go an extra mile in the success of the company in financial matters, decision making and related issues. Secondly, auditing companies such as Arthur Anderson firm should be held responsible for their fraudulent actions. The company approved some fraudulent transactions in favor of the company which should not be the case. Such companies should deliver auditing reports that can be trusted by the company stakeholders such as investors and the clients. Furthermore, there is substantial need for the government to be keen on auditing companies. For instance, if an independent company had been involved in auditing of the Enron Company the fraudulent practices could have been realized earlier. Recovery measures such as firing of the involved and reshuffling of the poor management could have saved the company from collapsing. Conclusively, companies should be keen on the code of ethics that are not mandatory but voluntary. Managers and other executives should carry themselves with integrity, honesty, transparency, and related qualities that ensure that they deliver their duties in favor of the company and its stakeholders. If all these recommendations could be implemented, the Enron Company could have been saved from collapsing.


Curall, Steven C., and Marc J. Epstein, M. J. (2003). The Fragility of Organizational Trust: Lessons Learnt From the rise and fall of Enron. Organizational Dynamics, 32 (2), 193-206.

Thomas, C. W. (2002). The Rise and Fall of Enron. Journal of Accountancy, 193 (4), 41.